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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-09 · 112 added, 198 removed, 330 unchanged (48% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations relates to the three and nine months ended September 30, 2021 and should be read together with the condensed consolidated financial statements and accompanying notes included herein, as well as our audited annual financial statements and associated management’s discussion, which are available within our Annual Report on Form 10-K for the year ended December 31, 2020 available on our Company’s profile on the Securities and Exchange Commission (“SEC”) website, www.sec.gov.

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations relates to the three months ended March 31, 2022 and should be read together with the condensed consolidated financial statements and accompanying notes included herein, as well as our audited annual financial statements and associated management’s discussion, which are available within our Annual Report on Form 10-K for the year ended December 31, 2021 available on our Company’s profile on the Securities and Exchange Commission (“SEC”) website, www.sec.gov.

Cautionary Statement Regarding Forward-Looking Statements

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These forward-looking statements include, but are not limited to, statements about our strategies;

expectations about future business plans, prospective performance, and opportunities, including potential acquisitions;

expectations about future business plans, prospective performance, and opportunities, including potential acquisitions, such as the acquisition of Farmers Water Company and the expected future benefit;

future financial performance;

regulatory and Arizona Corporation Commission ("ACC") proceedings and approvals, including anticipated timing and outcomes;

regulatory and Arizona Corporation Commission ("ACC") proceedings and approvals, including the outcome and timing of our rate case application and the anticipated timing of any resulting phase-in of new rates;

population and growth projections;

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A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC, as updated from time to time in our subsequent filings with the SEC.

Additional risks and uncertainties include, but are not limited to, whether all conditions precedent in the definitive agreement to acquire Farmers Water Company will be satisfied, including the receipt of ACC approval, and other risks to consummation of the acquisition, including circumstances that could give rise to the termination of the definitive agreement and the risk that the transaction will not be consummated without undue delay, cost or expense, or at all.

Although the forward-looking statements are based upon what management believes to be reasonable assumptions, investors cannot be assured that actual results will be consistent with these forward-looking statements, and the differences may be material.

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• Use of advanced technology and data;

• Employing subject matter experts and remaining thought and application leaders;

• Employing respected subject matter experts and retaining thought and application leaders;

• Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners, regulators, and utility staff are knowledgeable on the principles and practices of our Total Water Management approach;

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COVID-19 Update

In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China.

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic.

Since that time, government authorities around the world implemented numerous measures to try to reduce the spread of the COVID-19 pandemic, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home, or total lock-down (or similar) orders and business limitations and shutdowns.

During the three and nine months ended September 30, 2021, states and localities were in the midst of a vaccine distribution program;

however, the rate of vaccination has been slowed by vaccine hesitancy in some areas.

More recently, new variants of COVID-19, such as the Delta variant, that are more contagious than previous strains have emerged.

The spread of these new strains are causing many government authorities to reimplement the aforementioned measures to try to reduce the spread that had become less prevalent.

Our water and wastewater services are essential services and we intend to continue to provide those services for our customers.

Further, we continue to monitor the impact of COVID-19 pandemic on our business and operations, including how it will impact our customers, employees, suppliers, vendors, and business partners.

While the COVID-19 pandemic did not have a material effect on our business operations, results of operations, cash flows, and financial position for the three and nine months ended September 30, 2021, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and financial position will be impacted by the COVID-19 pandemic.

While the COVID-19 pandemic did not have a material effect on our business operations, results of operations, cash flows, and financial position for the three months ended March 31, 2022, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and financial position will be impacted by the COVID-19 pandemic.

The degree to which the COVID-19 pandemic impacts our business operations, results of operations, cash flows, and financial position will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted.

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and how quickly and to what extent normal economic and operating conditions can resume.

As a result of the economic hardships caused by the COVID-19 pandemic, we voluntarily agreed not to disconnect customers or charge late fees during the year ended December 31, 2020.

However, we resumed disconnections on February 9, 2021.

In 2020, we expanded our customer assistance program to include a larger customer base, while increasing the annual maximum benefit and including additional qualifying categories to include disabled veterans, deployed service members, furloughed workers, and customers with a medical hardship.

As of September 30, 2021, the COVID-19 pandemic did not have a material impact on uncollectible accounts.

However, we continue to face various uncertainties related to the impact of the continuing COVID-19 pandemic on the overall economy and our business, including whether we will continue to be able to sustain our level of bad debt expense.

Further, our current results and financial condition discussed herein may not be indicative of future operating results and trends.

As of March 31, 2022, the COVID-19 pandemic did not have a material impact on uncollectible accounts.

Our current results and financial condition discussed herein may not be indicative of future operating results and trends.

Refer to “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 for additional risks we face due to the COVID-19 pandemic.

Business Outlook

2020 and the first three quarters of 2021 continued the trend of positive growth in new connections.

2021 and the first quarter of 2022 continued the trend of positive growth in new connections.

According to the 2020 U.S.

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and had a population of 4.8 million, an increase of 14% over the 4.2 million people reported in the 2010 Census.

Metropolitan Phoenix continues to grow due to its low-cost housing, excellent weather, large and growing universities, a diverse employment base, and business friendly environment.

Metropolitan Phoenix continues to grow due to its low-cost housing, excellent weather, large and growing universities, a diverse employment base, and low taxes.

The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.7 million people by 2030 and 6.5 million by 2040.

During the three months ended September 30, 2021, Arizona’s employment rate increased by 5.1%, ranking the state in the top nine nationally for job growth.

During the three months ended March 31, 2022, Arizona’s employment rate increased by 3.7%, ranking the state in the top 20 nationally for job growth.

We believe that our utilities and service areas are directly in the anticipated path of growth primarily in the Phoenix metropolitan area.

Market data indicates that our service areas currently incorporate a large portion of the final platted lots, partially finished lots, and finished lots in the Phoenix metropolitan area.

Management believes that we are well-positioned to benefit from growth in the Phoenix metropolitan area due to the availability of lots and existing infrastructure in place within our services areas.

Management believes that we are well-positioned to benefit from the near-term growth in the Phoenix metropolitan area due to the availability of lots and existing infrastructure in place within our services areas.

Factors Affecting our Results of Operations

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• production and treatment costs;

• cybersecurity risks;

• weather and seasonality;

• access to and quality of water supply.

The COVID-19 pandemic may impact the degree to which these factors affect our financial condition and results of operations as discussed above under "COVID-19 Update."

We are subject to economic regulation by the state regulator, the ACC.

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An increase or decrease in our active service connections will affect our revenues and variable expenses in a corresponding manner.

Our total service connections, including both active service connections and connections to vacant homes, increased 4,361 connections, or 9.1% (8.4% annualized growth), from a total of 47,893 as of September 30, 2020 to 52,254 as of September 30, 2021.

This increase is primarily due to organic growth in our service areas.

As of September 30, 2021, active service connections increased 4,364, or 9.2% (8.3% annualized growth), to 51,958 compared to 47,594 active service connections as of September 30, 2020, due to organic growth in our service areas.

Our total service connections, including both active service connections and connections to vacant homes, increased 4,900 connections, or 9.7% (8.3% annualized growth), from a total of 50,403 as of March 31, 2021 to 55,303 as of March 31, 2022.

This increase was due primarily due to organic growth in our service areas combined with the acquisition of Global Water - Las Quintas Serenas Water Company, Inc.

("Las Quintas") in November 2021 which contributed 1,249 connections through March 31, 2022.

As of March 31, 2022, active service connections increased by 4,850 connections, or 9.7% (8.4% annualized growth), to 55,012 compared to 50,162 active service connections as of March 31, 2021, primarily due to organic growth in our service areas combined with the acquisition of Las Quintas.

Approximately 90.8% of the 55,012 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc.

(“Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc.

(“Palo Verde”) utilities as of September 30, 2021.

(“Palo Verde”) utilities as of March 31, 2022.

The graph below presents the historical change in active and total connections for our ongoing operations over the past five years.

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On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and recycled water rates, as well as the consolidation of water and/or wastewater rates for certain of the utilities, using the year ended December 31, 2019 as the test year for the rate case.

Refer to “—Rate Case Activity” for additional information.

Refer to “—Rate Case Activity” and "—Corporate Transactions —Rate Case" for additional information.

Our water and wastewater operations are also subject to extensive United States federal, state, and local laws and regulations governing the protection of the environment, health and safety, the quality of the water we deliver to our customers, water allocation rights, and the manner in which we collect, treat, and discharge wastewater.

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We have an established capital improvement plan to make targeted capital investments to repair and replace existing infrastructure as needed, address operating redundancy requirements, improve our overall financial performance and expand our infrastructure in areas where growth is occurring.

Additionally, to reduce our deferred tax liability of approximately $19.4 million resulting from the gain on the condemnation of the operations and assets of Valencia, we have completed the planned investments within our capital improvement plan that we determined will qualify under the Internal Revenue Code §1033 re-investment criteria pursuant to a favorable Private Letter Ruling with the Internal Revenue Service (the "IRS").

Refer to “—Corporate Transactions—Private Letter Ruling” for additional information.

Production and Treatment Costs

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Non-potable water does not need to be treated for commonly occurring and regulated constituents such as arsenic, or for other current or future human consumption health-based contaminants.

Cybersecurity Risks

In the regular course of our business, we handle a range of sensitive security, customer and business systems information.

A security breach of our information systems such as theft or the inappropriate release of certain types of information, including confidential customer, employee, financial or system operating information, could have a material adverse impact on our financial condition, results of operations or cash flows.

We operate in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure.

Despite implementation of security measures, our technology systems are vulnerable to disability, failures or unauthorized access.

Our facilities, information technology systems and other infrastructure facilities and systems and physical assets could be targets of such unauthorized access.

Failures or breaches of our systems could impact the reliability of our systems and also subject us to financial harm.

If our technology systems were to fail or be breached and if we are unable to recover in a timely way, we may not be able to fulfill critical business functions and sensitive confidential data could be compromised, which could have a material adverse impact on our financial condition, results of operations or cash flows.

We are subject to laws and rules issued by multiple government agencies concerning safeguarding and maintaining the confidentiality of our security, customer and business information.

The increasing promulgation of rules and standards will increase our compliance costs and our exposure to the potential risk of violations of the standards.

We have experienced, and expect to continue to experience, these types of threats and attempted intrusions.

The implementation of additional security measures could increase costs and have a material adverse impact on our financial results.

We have obtained cyber insurance to provide coverage for a portion of the losses and damages that may result from a security breach of our information technology systems, but such insurance may not cover the total loss or damage caused by a breach.

These types of events could also require significant management attention and resources, and could adversely affect Global Water Resources’ reputation with customers and the public.

Weather and Seasonality

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Rate Case Activity

On July 9, 2012, we filed rate applications with the ACC to adjust the revenue requirements for seven utilities.

n July 9, 2012, we filed rate applications with the ACC to adjust the revenue requirements for seven utilities.

In August 2013, we entered into a settlement agreement with the ACC staff, the Residential Utility Consumers Office, the City of Maricopa, and other parties to the rate case.

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2021 335 3,645

Whereas this phase-in of additional revenues was determined using a 2011 test year, to the extent that the number of active service connections increases from 2011 levels, the additional revenues may be greater than the amounts set forth above.

On the other hand, if active connections decrease or we experience declining usage per customer, we may not realize all of the anticipated revenues.

On September 20, 2018, the ACC issued Rate Decision No.

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We receive fees from the landowner/developer for undertaking these obligations that typically are a negotiated amount per planned equivalent dwelling unit for the specified development or parcel of land.

Payments are generally due to us from the landowner/developer based on progress of the development, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones and the final payment due upon final plat approval or sale of the subdivision.

final plat approval or sale of the subdivision.

The payments are non-refundable.

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Previously, the majority of AIAC and CIAC that we collected were not taxable;

However, with the enactment of the TCJA, they will be taxable going forward.

however, with the enactment of the TCJA, they are taxable going forward.

On November 27, 2018, the ACC ruled that the utility may require that the contributor pay a gross-up to the utility consisting of 55% of the income tax expense with the utility covering the remaining 45% of the income tax expense.

Effective January 1, 2021, CIAC and AIAC for regulated water and sewage disposal facility companies is excluded from income under Internal Revenue Code ("IRC") Section 118.

Due to the 2021 IRC Section 118 amendment, the Company refunded $1.4 million in developer taxes paid for contributions made after December 31, 2020.

For more details regarding the ruling, refer to "—Corporate Transactions — ACC Tax Docket."

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The City of Buckeye is obligated to pay the Company a growth premium equal to $3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of $45.0 million over the term of the agreement.

Private Letter Ruling

On June 2, 2016, we received a Private Letter Ruling from the IRS that, for purposes of deferring the approximately $19.4 million gain realized from the condemnation of the operations and assets of Valencia, determined that the assets converted upon the condemnation of such assets could be replaced through certain reclamation facility improvements contemplated by the Company under Internal Revenue Code §1033 as property similar or related in service or use.

Pursuant to Internal Revenue Code §1033, we would have been able to defer the gain on condemnation through the end of 2017, which was subsequently extended through the end of 2020.

The Company fully deferred the remaining tax liability during year ended December 31, 2020.

ACC Tax Docket

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Rate Decision No.

76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under

Rate Decision No.

76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under Rate Decision No.

74364 enacted in February 2014.

In 2020, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities was approximately $1.0 million.

In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities will be approximately $415,000, $669,000, $16,000, and $5,000, respectively.

In 2021, the final year of the phase-in, the annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities was approximately $415,000, $669,000, $16,000, and $5,000, respectively.

The ACC also approved a carrying cost of 4.25% on regulatory liabilities resulting from the difference of the fully phased-in rates to be applied in 2021 versus the phased-in rates refunded in the years leading up to 2021 (i.e., 2018 through 2020).

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The Company's utilities have adopted the hybrid sharing method for income tax on CIAC and AIAC.

2020 Common Stock Offering

On January 21, 2020, we completed a public offering of 870,000 shares of common stock at a public offering price per share of $12.50, for gross proceeds of $10.9 million.

On January 30, 2020, we issued an additional 130,000 shares of common stock at the public offering price of $12.50 per share, for gross proceeds of $1.6 million, resulting in total proceeds from the offering of approximately $12.5 million.

The issuance of the additional shares was completed pursuant to the exercise in full of the underwriter's over-allotment option.

We received net proceeds of approximately $11.5 million after deducting underwriting discounts and commissions and offering expenses paid by us, which collectively totaled approximately $1.0 million.

Effective January 1, 2021, contributions made in aid of construction and advances made in aid of construction for regulated water and sewage disposal facility companies were excluded from income under IRC Section 118.

ACC Rate Case

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Certain of our utilities, including Santa Cruz and Palo Verde, have also requested that the rate increases be phased in over three years, beginning January 1, 2022.

A final decision is not expected until the first quarter of 2022;

therefore, any phase-in will likely not begin as requested on January 1, 2022 and may be shorter or longer than three years, if a revenue increase is approved.

A final decision is not expected until the second quarter of 2022;

therefore, any phase-in did not begin as requested on January 1, 2022 and may be shorter or longer than three years, if a revenue increase is approved.

We also requested the consolidation of water and/or wastewater rates for our Red Rock, Santa Cruz, Palo Verde, Picacho Water, and Picacho Utilities located in Pinal County.

These utilities make up approximately 97% of the Company's active service connections;

Of our utilities filing a rate case, these utilities make up approximately 96% of the Company's active service connections;

provide or will provide water, wastewater, and recycled water services;

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There can also be no assurance as to the timing of when an approved rate increase (if any) would go into effect.

Acquisition of Red Rock Utilities

On October 16, 2018, we completed the acquisition of Red Rock, an operator of a water and a wastewater utility with service areas in Pima and Pinal counties of Arizona, for a purchase price of $5.9 million.

The acquisition added over 1,650 connections and approximately 9 square miles of service area.

The Company is obligated to pay to the seller a growth premium equal to $750 for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date or twenty years from the acquisition date.

The three specified growth premium areas are located in Pima County, Arizona where Red Rock has not yet begun operating, and where Red Rock is authorized to provide water utility services only.

As of September 30, 2021, no meters have been installed and no accounts have been established in any of the three growth premium areas.

We believe this acquisition is consistent with the Company's declared strategy of making accretive acquisitions.

Revolving Credit Line

On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation, for a two-year revolving line of credit up to $10.0 million with an initial maturity date of April 30, 2022.

This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, bears an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00% and has no unused line fee.

This credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in April 2020.

As of March 31, 2022, we had no outstanding borrowings under this credit line.

On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the loan agreement pursuant to which, among other things, the maturity date for the Company’s revolving line of credit was extended to April 30, 2024.

Recent Events

Acquisition of Las Quintas Serenas Water Company

On November 3, 2021, the Company completed the acquisition of Las Quintas Serenas Water Company ("Las Quintas"), an operator of a water utility with service area in the Pima county of Arizona.

The acquisition added over 1,100 connections and approximately 2.5 square miles of service area.

Renewal of Revolving Credit Line

On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the Northern Trust Loan Agreement pursuant to which, among other things, the maturity date for the Company’s revolving line of credit was extended from April 30, 2022 to April 30, 2024.

Sale of Wireless Communication Tower

On April 9, 2021, the Company sold a wireless communication tower and related easement rights which resulted in a $1.5 million gain recorded as other income.

Definitive Agreement to Acquire Farmers Water Company

On April 14, 2022 the Company signed a definitive agreement to acquire Farmers Water Company, an operator of a water utility with service area in Pima County, Arizona, subject to customary closing conditions and ACC approval.

The acquisition, if completed, would add approximately 3,300 active water service connections and approximately 21.5 square miles of service area.

Acquisition of Rincon Water Company, Inc.

On January 20, 2022, the Company acquired the assets of Rincon Water Company, Inc., a water utility in Pima County, Arizona.

The acquisition added an additional 73 connections and approximately 8.6 square miles of service area at the time of acquisition.

Acquisition of Twin Hawks Utility, Inc

On January 13, 2022, Santa Cruz acquired the assets of Twin Hawks Utility, Inc., a water utility in Pinal County, Arizona.

The acquisition added an additional 18 connections and approximately 0.5 square miles of service area at the time of acquisition to the assets of Santa Cruz.

Segment Reporting

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Based on the information described above and in accordance with the applicable literature, management has concluded that we are currently organized and operated as one operating and reportable segment.

Comparison of Results of Operations for the Three Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020 (in thousands, except per share amounts):

For the Three Months Ended September 30,

Revenues $ 11,404 $ 10,757

Operating expenses 9,111 7,865

Operating income 2,293 2,892

Total other expense (472) (1,263)

Income before income taxes 1,821 1,629

Income tax expense (323) (498)

Net income $ 1,498 $ 1,131

Basic earnings per common share $ 0.07 $ 0.05

Diluted earnings per common share $ 0.07 $ 0.05

Revenues – The following table summarizes our revenues for the three months ended September 30, 2021 and 2020 (in thousands):

For the Three Months Ended September 30,

Water services $ 5,067 $ 5,492

Wastewater and recycled water services 5,645 5,238

Unregulated revenues 692 27

Total revenues $ 11,404 $ 10,757

Total revenues increased $0.6 million, or 6.0%, to $11.4 million for the three months ended September 30, 2021 compared to $10.8 million for the three months ended September 30, 2020.

This increase was primarily driven by the recognition of $0.7 million of ICFA revenue related to funds received during the quarter for an area where the company had completed all obligations under the ICFA agreement, including water and wastewater services.

Refer to Note 2 — "Regulatory Decision and Related Accounting and Policy Changes" o f the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information about our ICFAs.

The increase in revenue also reflects the 9.2% increase in active service connections and the increase in rates related to Rate Decision No.

The increase in revenue was partially offset by decreased consumption which was primarily driven by the increase in precipitation during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Water Services – Water services revenue decreased $0.4 million, or 7.8%, to $5.1 million for the three months ended September 30, 2021 compared to $5.5 million for the three months ended September 30, 2020.

The decrease in water services revenues was primarily related to decreased consumption, partially offset by growth in connections and increased establishment and disconnection fees during the three months ended September 30, 2021.

Water services revenue based on consumption decreased $0.7 million, or 23.2%, to $2.4 million for the three months ended September 30, 2021 compared to $3.2 million for the three months ended September 30, 2020.

The decrease was primarily driven by decreased residential and irrigation consumption resulting from higher precipitation for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Active water connections increased 9.4% to 27,003 as of September 30, 2021 from 24,674 as of September 30, 2020, primarily due to organic growth in our service areas.

Water consumption decreased 24.6% to 837 million gallons for the three months ended September 30, 2021 from 1.1 billion gallons for the three months ended September 30, 2020.

The decrease in consumption was primarily related to a decrease in irrigation and residential consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.2 million, or 9.3%, to $2.5 million for the three months ended September 30, 2021 from $2.3 million for the three months ended September 30, 2020.

The increase was primarily driven by an increase in active service connections, combined with an increase in rates related to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 7.8%, to $5.6 million for the three months ended September 30, 2021 compared to $5.2 million for the three months ended September 30, 2020.

The increase in wastewater and recycled water services revenue included a $0.5 million increase in wastewater services revenue.

The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 8.9% to 24,955 as of September 30, 2021, from 22,920 as of September 30, 2020, as well as the increase in rates related to Rate Decision No.

Recycled water services revenue, which is based on the number of gallons delivered, decreased $0.1 million, or 31.0%, to $0.3 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The decrease in recycled water services revenue was primarily related to the decrease in recycled water consumption.

The volume of recycled water delivered decreased 99 million gallons, or 36.2%, to 174 million gallons for the three months ended September 30, 2021 compared to 273 million gallons for the three months ended September 30, 2020.

Operating Expenses – The following table summarizes our operating expenses for the three months ended September 30, 2021 and 2020 (in thousands):

For the Three Months Ended September 30,

Operations and maintenance $ 2,677 $ 2,584

General and administrative 4,078 2,969

Depreciation and amortization 2,356 2,312

Total operating expenses $ 9,111 $ 7,865

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.1 million, or 3.6%, to $2.7 million for the three months ended September 30, 2021 compared to $2.6 million for the three months ended September 30, 2020.

Repairs and maintenance expenses increased $0.1 million, to $130,000 for the three months ended September 30, 2021 compared to $63,000 for the three months ended September 30, 2020, primarily due to the replacement of filters.

General and Administrative – General and administrative costs include the day-to-day expenses of office operation, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees.

These costs increased $1.1 million, or 37.4%, to $4.1 million for the three months ended September 30, 2021 compared to $3.0 million for the three months ended September 30, 2020.

Professional fees increased $0.3 million to $0.5 million for the three months ended September 30, 2021 compared to $0.2 million for the three months ended September 30, 2020.

The increase was primarily related to legal fees incurred for acquisition related matters for the three months ended September 30, 2021.

Personnel and related expenses increased $0.3 million, or 19.0%, to $1.6 million for the three months ended September 30, 2021 compared to $1.3 million for the three months ended September 30, 2020.

The increase was primarily driven by the increases in medical and other employee related expense for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Deferred compensation expenses increased $0.3 million, or 77.8%, to $0.8 million for the three months ended September 30, 2021 compared to $0.4 million for the three months ended September 30, 2020.

The increase was primarily driven by restricted stock awards granted in 2021, combined with increased expense due to the increase in stock price.

This increase was partially offset by the decrease in option expense attributable to the full vesting of the 2017 options granted and forfeitures during the three months ended September 30, 2021.

Information technology expenses increased slightly by less than $0.1 million, or 45.4%, but remained consistent at $0.1 million for both the three months ended September 30, 2021 and 2020.

The increase was mainly attributable to network security assessment and incident response plan consulting fees incurred during the three months ended September 30, 2021.

Depreciation and amortization - Depreciation and amortization expense increased slightly by less than $0.1 million, or 1.9%, to $2.4 million for the three months ended September 30, 2021, from $2.3 million for the three months ended September 30, 2020.

The increase was primarily driven by increased depreciation due to the increase in fixed assets.

Other Expense – Other expense totaled $0.5 million for the three months ended September 30, 2021, compared to other expense of $1.3 million for the three months ended September 30, 2020.

The $0.8 million improvement in other expense was primarily attributed to the increase in growth premiums received from the Valencia earnout during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

This increase was primarily driven by the receipt of a lump sum payment of $0.4 million from the City of Buckeye due to an internal audit of premiums that resulted in findings of past growth premiums that had not been remitted to the Company.

The increase was also due to higher earnout from Valencia during the quarter due to increased meter connections over the prior year period.

The earnout consists of $3,000 for each new water meter installed within Valencia Water Company’s prior service areas.

Income Tax Expense – Income tax expense decreased $0.2 million to $0.3 million for the three months ended September 30, 2021 compared to tax expense of $0.5 million for the three months ended September 30, 2020.

The decrease was driven by lower pretax income for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Net Income – Net income totaled $1.5 million for the three months ended September 30, 2021 compared to $1.1 million for the three months ended September 30, 2020.

The increase was primarily attributed to the $0.8 million decrease in other expenses partially offset by the $0.6 million decrease in operating income.

Comparison of Results of Operations for the Nine Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020 (in thousands, except per share amounts):

For the Nine Months Ended September 30,

Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021 (in thousands, except per share amounts):

For the Three Months Ended March 31,

Revenues $ 10,029 $ 9,258

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Diluted earnings per common share $ 0.04 $ (0.01)

Revenues – The following table summarizes our revenues for the nine months ended September 30, 2021 and 2020 (in thousands):

For the Nine Months Ended September 30,

Revenues – The following table summarizes our revenues for the three months ended March 31, 2022 and 2021 (in thousands):

For the Three Months Ended March 31,

Water services $ 4,348 $ 3,986

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Total revenues $ 10,029 $ 9,258

Total revenues increased $2.7 million, or 9.5%, to $31.6 million for the nine months ended September 30, 2021 compared to $28.9 million for the nine months ended September 30, 2020.

The increase in revenue reflects the 9.2% increase in active service connections, combined with the increase in rates related to Rate Decision No.

This increase was also driven by the recognition of $0.7 million of ICFA revenue related to funds received during the nine months ended September 30, 2021 for an area where the company had completed all obligations under the ICFA agreement, including water and wastewater services.

Refer to Note 2 — "Regulatory Decision and Related Accounting and Policy Changes" for additional information about our ICFAs.

Water Services – Water services revenue increased $0.7 million, or 5.5%, to $14.3 million for the nine months ended September 30, 2021 compared to $13.6 million for the nine months ended September 30, 2020.

The increase in water services revenues was primarily related to growth in connections.

Water services revenue based on consumption slightly increased by less than $0.1 million, or 0.2%, but remained consistent at $6.7 million for both the nine months ended September 30, 2021 and 2020.

This increase was primarily driven by increases in rates for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Active water connections increased 9.4% to 27,003 as of September 30, 2021 from 24,674 as of September 30, 2020, primarily due to organic growth in our service areas.

Water consumption slightly decreased by 59 million gallons, or 2.4%, but remained consistent at 2.5 billion gallons for both the nine months ended September 30, 2021 and September 30, 2020.

The decrease in consumption was primarily related to the decrease in irrigation consumption driven by higher precipitation.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.6 million, or 8.5%, to $7.3 million for the nine months ended September 30, 2021 compared to $6.8 million for the nine months ended September 30, 2020.

The increase was primarily due to the increase in active service connections, combined with an increase in rates related to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.4 million, or 9.1%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Total revenues increased $0.8 million, or 8.3%, to $10.0 million for the three months ended March 31, 2022 compared to $9.3 million for the three months ended March 31, 2021.

The increase in revenue was primarily driven by organic growth combined with new connections associated with the acquisition of Las Quintas in 2021 which together reflects the 9.7% increase in active service connections year-over-year.

Water Services – Water services revenue increased $0.4 million, or 9.1%, to $4.3 million for the three months ended March 31, 2022 compared to $4.0 million for the three months ended March 31, 2021.

The increase in water services revenues was primarily related to increased consumption and growth in connections.

Water services revenue based on consumption slightly increased by less than $0.1 million, or 1.5%, to $1.6 million for the three months ended March 31, 2022 compared to $1.5 million for the three months ended 2021.

Active water connections increased 11.9% to 29,210 as of March 31, 2022 from 26,094 as of March 31, 2021, primarily due to organic growth in our service areas combined with new connections associated with the acquisition of Las Quintas.

Water consumption slightly increased by 9 million gallons, or 1.4%, from 625 million gallons for the three months ended March 31, 2021 to 634 million gallons for the three months ended March 31, 2022.

The increase in consumption was primarily related to the increase in connections including the new connections associated with our acquisition of Las Quintas.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.3 million, or 11.3%, to $2.7 million for the three months ended March 31, 2022 compared to $2.4 million for the three months ended March 31, 2021.

The increase was primarily due to the increase in active service connections which included organic growth combined with new connections associated with the acquisition of Las Quintas.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 8.4%, to 5.7 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The increase in wastewater and recycled water services revenue was driven by a $0.4 million increase in wastewater services revenue.

Recycled water services revenue, which is based on the number of gallons delivered, decreased $20,000, or 2.2%, but remained consistent at $0.9 million for both the nine months ended September 30, 2021 and 2020.

The decrease in recycled water services revenue was primarily driven by the decrease in number of gallons consumed.

The volume of recycled water delivered decreased 53 million gallons, or 9.2%, to 526 million gallons for the nine months ended September 30, 2021 compared to 580 million gallons for the nine months ended September 30, 2020.

Operating Expenses – The following table summarizes our operating expenses for the nine months ended September 30, 2021 and 2020 (in thousands):

For the Nine Months Ended September 30,

The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 7.2% to 25,802 as of March 31, 2022, from 24,068 as of March 31, 2021.

Recycled water services revenue, which is based on the number of gallons delivered, increased $5,000, or 3.4%, but remained consistent at $0.2 million for both the three months ended March 31, 2022 and March 31, 2021.

The increase in recycled water services revenue was primarily driven by the increase in number of gallons consumed.

The volume of recycled water delivered increased 3 million gallons, or 2.7%, to 97 million gallons for the three months ended March 31, 2022 compared to 94 million gallons for the three months ended March 31, 2021.

Operating Expenses – The following table summarizes our operating expenses for the three months ended March 31, 2022 and 2021 (in thousands):

For the Three Months Ended March 31,

Operations and maintenance $ 2,543 $ 2,499

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Total operating expenses $ 8,666 $ 8,215

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.5 million, or 7.0%, to $7.7 million for the nine months ended September 30, 2021 compared to $7.2 million for the nine months ended September 30, 2020.

Property tax expense increased $0.2 million to $1.9 million for the nine months ended September 30, 2021 compared to $1.8 million for the nine months ended September 30, 2020.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, remained constant at $2.5 million for both the three months ended March 31, 2022 and 2021.

Property tax expense increased by less than $0.1 million to $0.7 million for the three months ended March 31, 2022 compared to $0.6 million for the three months ended March 31, 2021.

Property taxes are calculated using a centrally valued property calculation, which derives property values based upon three-year historical average revenues.

As revenues increase, we expect property taxes to also increase.

Total personnel expenses increased $0.2 million, or 9.8%, to $2.4 million for the nine months ended September 30, 2021 compared to $2.2 million for the nine months ended September 30, 2020, primarily due to increased salary and wages expense and medical benefits expense.

These costs increased $2.6 million, or 30.0%, to

$11.3 million for the nine months ended September 30, 2021 compared to $8.7 million for the nine months ended September 30, 2020.

Deferred compensation expense increased $1.2 million to $2.2 million for the nine months ended September 30, 2021, from $1.0 million for the nine months ended September 30, 2020.

The increase was primarily driven by restricted stock awards granted during the nine months ended September 30, 2021, combined with increased expense due to the increase in stock price.

Refer to Note 13 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

Board compensation expenses increased $0.5 million to $0.6 million for the nine months ended September 30, 2021 compared to $0.1 million for the nine months ended September 30, 2020.

The increase was primarily related to a $0.5 million increase in Deferred Phantom Unit and Restricted Stock Unit expense which was primarily driven by the increase in stock price for the nine months ended September 30, 2021 compared to the decrease in stock price for the nine months ended September 30, 2020.

Personnel and related expenses increased $0.4 million, or 9.4%, to $4.2 million for the nine months ended September 30, 2021 compared to $3.8 million for the nine months ended September 30, 2020.

The increase was primarily related to increases in employee benefit expense coupled with increases in salaries and wages for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

Professional fees expenses increased $0.2 million, or 21.2%, to $1.4 million for the nine months ended September 30, 2021 from $1.1 million for the nine months ended September 30, 2020.

The increase was primarily related to legal fees incurred regarding acquisition matters among other miscellaneous corporate matters.

Depreciation and amortization - Depreciation and amortization expense increased $0.4 million, or 5.6%, to $7.0 million for the nine months ended September 30, 2021, from $6.6 million for the nine months ended September 30, 2020.

The increase was primarily driven by increased depreciation due to the increase in fixed assets, partially offset by decreased amortization of intangible assets.

Other Expense – Other expense totaled $1.5 million for the nine months ended September 30, 2021 compared to other expense of $4.3 million for the nine months ended September 30, 2020.

The $2.8 million improvement in other expense was primarily attributed to $1.5 million of income recognized on the sale of a wireless communications tower, combined with a $0.7 million increase in the Valencia earnout.

The increase in growth premiums was primarily driven by the receipt of a lump sum payment of $0.4 million from the City of Buckeye due to an internal audit of premiums that resulted in findings of past growth premiums that had not been remitted to the Company.

The increase also reflects the one-time loss on disposal of assets recognized during the nine months ended September 30, 2020 in the amount of $0.5 million.

Income Tax Expense – Income tax expense increased $0.2 million to $0.9 million for the nine months ended September 30, 2021 compared to $0.7 million for the nine months ended September 30, 2020.

These costs increased $0.3 million, or 8.3%, to $3.8 million for the three months ended March 31, 2022 compared to $3.5 million for the three months ended March 31, 2021.

Professional fees expenses increased $0.2 million, or 46.5%, to $0.6 million for the three months ended March 31, 2022 from $0.4 million for the three months ended March 31, 2021.

The increase was primarily related to legal fees incurred relating to acquisition matters, and the ongoing rate case, among other miscellaneous corporate matters.

Depreciation and amortization - Depreciation and amortization expense increased $0.1 million, or 5.3%, to $2.3 million for the three months ended March 31, 2022, from $2.2 million for the three months ended March 31, 2021.

The increase was primarily driven by increased depreciation due to the increase in fixed assets.

Other Income/(Expense) – Other expense totaled $0.1 million for the three months ended March 31, 2022 compared to other expense of $1.3 million for the three months ended March 31, 2021.

The $1.2 million improvement in other expense was primarily attributed to $1.1 million in Buckeye growth premium.

Income Tax Benefit (Expense) – Income tax expense increased $0.4 million to $0.3 million for the three months ended March 31, 2022 compared to a tax benefit of less than $0.1 million for the three months ended March 31, 2021.

The increase was driven by an increase in pretax income.

Net Income – Net income totaled $3.3 million for the nine months ended September 30, 2021 compared to net income of $1.4 million for the nine months ended September 30, 2020.

The $1.9 million increase was primarily attributed to the $2.8 million decrease in total other expense partially offset by the $0.7 million decrease in operating income for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Net Income (Loss) – Net income totaled $0.9 million for the three months ended March 31, 2022 compared to net loss of $0.2 million for the three months ended March 31, 2021.

The $1.1 million increase was primarily attributed to the increased operating income driven by connection growth as well as the decrease in total other expense due to the increased Buckeye growth premium in the quarter ended March 31, 2022 compared to the three months ended March 31, 2021.

Outstanding Share Data

As of November 8, 2021, there were 22,649,186 shares of our common stock outstanding and stock based awards to acquire an additional 755,695 shares of our common stock outstanding.

As of May 4, 2022, there were 22,649,492 shares of our common stock outstanding and stock-based awards to acquire an additional 784,627 shares of our common stock outstanding.

Liquidity and Capital Resources

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Such recovery will take place over an extended period of time because recovery through rate increases is subject to regulatory lag.

As of September 30, 2021, we have no notable near-term cash expenditures, other than the first and second principal payments for our Series B senior secured notes in the amounts of $1.9 million due in December 2021 and $1.9 million due in June 2022.

While specific facts and circumstances could change, we believe that we have sufficient cash on hand, the ability to draw on our $10.0 million revolver, and will be able to generate sufficient cash flows to meet our operating cash flow requirements and capital expenditure plan, as well as remain in compliance with our debt covenants, for at least the next twelve months.

However, our near term cash flow may be impacted by the COVID-19 pandemic.

Refer to “—COVID-19 Update” and “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 for additional discussion relating to the COVID-19 pandemic.

As of March 31, 2022, we have no notable near-term cash expenditures, other than the principal payments for our Series B senior secured notes in the amounts of $1.9 million due in June 2022 and $1.9 million due in December 2022.

In March 2014, we initiated a dividend program to declare and pay a monthly dividend.

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Our future cash flows from operating activities will be affected by economic utility regulation, infrastructure investment, growth in service connections, customer usage of water, compliance with environmental health and safety standards, production costs, weather, and seasonality.

For the nine months ended September 30, 2021, our net cash provided by operating activities totaled $15.2 million compared to $11.7 million for the nine months ended September 30, 2020.

The $3.5 million increase in cash from operating activities was primarily driven by the $1.5 million of income recognized on the sale of a wireless communications tower coupled with increases in accounts payable and other current and noncurrent liabilities for the nine months ended September 30, 2021 compared to September 30, 2020.

For the three months ended March 31, 2022, our net cash provided by operating activities totaled $5.4 million compared to $4.8 million for the three months ended March 31, 2021.

The $0.6 million increase in cash from operating activities was primarily driven by the $1.1 million of income recognized on the Buckeye growth premium received in the quarter ended March 31, 2022 offset by less than $0.1 million decrease in other noncurrent liabilities relating to HUF funds transferred to CIAC.

Cash from Investing Activities

Our net cash used in investing activities totaled $11.8 million for the nine months ended September 30, 2021 compared to $7.5 million for the nine months ended September 30, 2020.

The $4.3 million increase in cash used in investing activities was primarily driven by an increase in capital expenditures of $4.3 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Our net cash used in investing activities totaled $6.3 million for the three months ended March 31, 2022 compared to $3.3 million for the three months ended March 31, 2021.

The $3.0 million increase in cash used in investing activities was primarily driven by an increase in capital expenditures of $2.9 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

We continue to invest capital prudently in our existing, core service areas where we are able to deploy our Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities.

Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.

Cash from Financing Activities

Our net cash used in financing activities totaled $2.7 million for the nine months ended September 30, 2021 compared to $7.1 million in cash provided by financing activities for the nine months ended September 30, 2020.

This change was primarily driven by the $11.5 million in net proceeds received from our public offering of stock in January 2020, partially offset by increased AIAC of $1.8 million for the nine months ended September 30, 2021.

Our net cash used in financing activities totaled $0.6 million for the three months ended March 31, 2022 compared to $0.7 million in cash used in financing activities for the three months ended March 31, 2021.

This change was primarily driven by loan and capital lease repayments of approximately $0.3 million for the three months ended March 31, 2022 compared to less than $0.1 million for the three months ended March 31, 2021.

Senior Secured Notes

On June 24, 2016, we issued two series of senior secured notes with a total principal balance of $115.0 million at a blended interest rate of 4.55%.

Series A carries a principal balance of $28.8 million and bears an interest rate of 4.38% over a twelve-year term, with the principal payment due on June 15, 2028.

Series A carries a principal balance of $28.8 million and bears an interest rate of 4.38% over a twelve-

year term, with the principal payment due on June 15, 2028.

Series B carries a principal balance of $86.3 million and bears an interest rate of 4.58% over a 20-year term.

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The debt service ratio increases to 1.25 for any fiscal quarter during the period from and after June 30, 2024.

As of September 30, 2021, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of September 30, 2021 and December 31, 2020 were $0.5 million and $0.6 million, respectively.

As of March 31, 2022, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of March 31, 2022 and December 31, 2021 were both $0.5 million.

Revolving Credit Line

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Refer to Note 11 — "Debt" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

As of September 30, 2021, the Company was in compliance with its financial debt covenants.

As of September 30, 2021, the Company had no outstanding borrowings under this credit line with Northern Trust Bank.

As of March 31, 2022, the Company was in compliance with its financial debt covenants.

As of March 31, 2022, the Company had no outstanding borrowings under this credit line with Northern Trust Bank.

Insurance Coverage

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Off Balance Sheet Arrangements

As of September 30, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements.

As of March 31, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis